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EU Dividend Taxation: Considering Hungary

The Hungarian Supreme Court has recently requested, a preliminary ruling from the European Court of Justice (ECJ) in a case involving a Luxembourg SICAV investing in Hungary. The ECJ will have to rule on the Hungarian fiscal regime applicable to distributions of dividends, which provides a full exemption of withholding tax to resident recipients, while certain legal requirements must be met by non-residents in order to benefit from the same favorable regime. Taxand Luxembourg considers whether these legal requirements may be deemed discriminatory towards non-resident taxpayers.

By responding to the following three questions, the ECJ will interpret the fiscal treatment at issue in light of the European law in order to determine whether it has to be considered as discriminatory towards non-residents.

Question 1
Is the exemption from tax on dividends granted by the Hungarian legislation to recipients of dividends resident in Hungary compatible with the provisions of the TFEU on the principle of freedom of establishment, the principle of equal treatment and the principle of free movement of capital?

As opposed to resident recipients of dividends, the Hungarian fiscal regime requires non-residents to be exempted from tax on dividends that the holding (proportion of its registered shares) in the capital of the resident company amounted permanently to at least 20% for at least two consecutive years at the time of the dividend distribution (allocation).

Question 2
Would there be any effect on the answer to question (1) by considering that:

Resident recipients of dividends are exempt from tax on dividends under the Hungarian legislation and the tax burden of non-resident recipients of dividends depends on the applicability of the Council Directive 90/435/EEC of 23 July 1990 (common system of taxation applicable in the case of parent companies and subsidiaries of different Member States) or, the Double Tax Treaty between the Republic of Hungary and the Grand Duchy of Luxembourg of 15 January 1990.

Question 3
Could the national tax authorities invoke Article 65 of the TFEU to justify the fiscal treatment at issue?

Article 65 of the TFEU is an exception to Article 63 of the TFEU, which allows for different tax treatment of non-residents and foreign investments, but with the reservation that this must not represent a means of arbitrary discrimination or a distinguished restriction.

Taxand's Take

This case is similar to previous cases rendered in relation to the infringement of the free movement of capital (e.g. European Commission vs. Federal Republic of Germany of 20 October 2011 and "Joint cases" from 10 May 2012) and it can be expected that the ECJ will rule in favor of the taxpayer.